Gold, Silver, Metal Prices: Friday Commentary

Lackluster conditions marked the passage of the overnight trading hours in metals as the dollar’s fall slowed considerably and as oil prices started showing signs of nervousness about demand in the commodity. That which did fall in the wee hours, was the British pound. It was…pounded by concerns that Lloyds Banking Group and other similar UK institutions might have more purging to do from their balance sheets following the credit binge of the pre-2007 era.

The legacy of the ‘correction’ that followed that wild era is still quite visible in the American financial landscape. However, small bits of good news appear to be trickling in, perhaps imperceptibly at this time, but they could still later the shape of things down the road. For example, net worth for US households and non-profits rose to $53.1 trillion in Q2. That $2 trillion gain (largely on the back of 50% + gains in equity markets) is seen as mitigating the strains on spending being currently experienced by Main Street.

Anger, on the other hand, continues to define the political landscape in America, as a highly polarized populace keeps bickering about health care, the handling of the economy, and a host of other issues. Not a huge surprise, following he dislocations that have taken place since 2007 (although we date the genesis of some parts of them to 2001 and 2005). Nevertheless, what is one to make of Speaker Pelosi’s overt concern that the (over)heated rhetoric against the President and/or his policies could push unstable people over the edge? Thank you, Joe Wilson.

Former President Carter has characterized the polemic as racially-motivated. In a sad attempt to appeal to gut-level fears, some in the US bullion community have been saturating the conservative and ultra conservative radio and TV airwaves with commercials for gold as the saviour from Mr. Obama’s policies. Because, you know, America will cease to exist if things continue along this path. Therefore, the answer is gold. And guns.

The euro was also seen as a possible candidate for a retreat against the dollar. This, not only following its 3%-magnitude (in September alone) ascent to levels beyond those previously targeted by currency analysts, but also because of potential slippages that players see as just ahead in various equity markets. As of the 9 o’clock hour, the greenback was quoted at 76.43 on the index, while crude oil declined 44 cents to $72.03 and was still seen as needing to keep the 70-72 range aloft lest it should slip significantly lower.

Friday’s New York metals trading session opened on the steady-to-higher side for gold, but showed mixed results otherwise. Spot gold was up $1.20 at the start, quoted at $1013.50 with little in the way of fresh outside news to move the market at this juncture. Expected corrections have remained invisible thus far and some traders now peg the matching of last year’s high for next week’s calendar.

Stabs at the $1020 level remain in the cards for the rest of the day, as little opposition to the longs has materialized, and as book-squaring -at least today- may not amount to chip-cashing. Let’s see where the NY week in gold finishes later on, and what reports the market gets from weekend activities in India’s bazaars. Traders we polled in NY this week during Platinum Week were-for the most part-scratching their heads when it comes to the September Surge.

Anyone with more than ten years under their belt in the field nervously watches spec funds in the driver’s seat and frets about the market’s fundamentals – a chapter not largely, but fully ignored during this period. Thus, the declaration from some novice newsletter vendors that we are now on a one-way highway to the lunar surface. We certainly would be, if the remainder of such ‘marginal’ components of the market as mine outupt, scrap flows, and fabrication demand all played into the equation. They are not only neutral right now, but diametrically opposed to the manifest happenings.

Reuters’ Jan Harvey and Veronica Brown chime in on some of the head-scratching issues the professionals have alluded to recently:

"The stars have aligned for gold prices, leaving them just a short hop from record highs, but as bullion bugs celebrate, the rally appears to have flaws. Prices have been swept along to 18-month highs at $1,023.85 — opening the door to record levels at $1,030.80 — on a wave of dollar weakness, inflation concerns and technical momentum. But in the rush, a few issues do not sit easily with the bullish show, including ultra-stretched long speculative positions on the New York futures market, tame physical investment and little movement of gold in non-dollar terms.

"I’m not bearish gold, but this has gone too far too fast. I don’t think that all the ingredients are in place for this to be a sustainable rally," said John Reade, metals strategist at UBS in London. On the face of it, the case for investing in gold looks compelling on a number of fronts on a longer-term basis. The dollar is seen weakening further, making dollar-denominated gold cheaper for non-U.S. investors and heightening its appeal as an alternative asset. Europe’s leading central banks have agreed to a third pact to limit sales of the metal, while China already has raised its stockpile by some 75%.

Those scrambling to get in front of potential inflation, predicted by many as leading economies seek to untangle themselves from stimulus spending and near-zero interest rates, have also flocked to the shiny stuff as a hedge. Most of the run higher has been led by major flows into the U.S. COMEX gold futures market, with trading investors and speculators vastly increasing long positions, leaving the price vulnerable to rapid and sharp falls. The latest weekly Commitments of Traders report published by the Commodity Futures Trading Commission showed net long positions had widened to a massive 224,676 as of Sept. 8 compared with 184,501 a week earlier.

Positioning looks set to extend more, but the longer it gets, the bigger the risk. "Everybody is saying the market is too long, but no-one wants to sell," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong." There’s too much money in the world as central banks take easy policy and as funds push up the market with the money. They see (the) gold market as easy to manipulate…like a casino."

But flows into exchange traded funds, the beneficiary of gold buying earlier in the year, have not kept pace with the latest price surge, and physical demand from the jewellery sector has gone cold. Inflows into gold-backed ETFs have picked up a little after plateauing over the summer months, but remain well down on the first quarter’s record levels. On the currency front, the dollar has fallen to one-year lows against a basket of major currencies, while the euro looks set to hit $1.50.

As a function of dollar weakness with an inverse correlation, gold is pulsing higher as the dollar falls, but that does not equal optimum conditions for the metal, some say. "This is not a bull market for gold, it’s a bear market for paper currencies, led by the dollar," said Sean Corrigan, chief investment officer at Diapason Commodities Management in Switzerland. A look at non-dollar denominated gold also shows an unfamiliar pattern as the current rally is not being replicated. Sterling-priced gold, for instance, is only at its highest since April, while bullion in commodity currency the Australian dollar is struggling to revisit recent two-month highs. The other missing link to the current rally is fear, gold’s usual cheerleader when prices are surging.

"There is no real fear, which would be supportive for gold in the medium term," said Eugen Weinberg, commodities strategist at Commerzbank. The market is not concerned any more about the economy or about the health of the financial system, and I think this will not be sustainable." Gold last got through the psychological $1,000 barrier and hit a record high in March 2008 — coinciding with the collapse of Bear Stearns and subsequent distressed sale to JPMorgan.

Mike Lenhoff, chief strategist at Brewin Dolphin, looking back at the financial crisis, notes how each time gold raced up in crisis mode, it quickly sold off again. "I don’t think gold bullion is going much beyond where it has got to already. It had its chance to fly with the mother of all financial upheavals, and it didn’t."

Mothers notwithstanding, as things stand right now, the yellow metal is set to mark its fifth week of fund-driven gains. In fact, some $9 billion has flowed into commodity funds this year, as speculators see either strong demand from the economic recoveries, and/or expect the Fed to be unable to contain inflation as we round the corner into next year. At least, those are the official excuses heard from fund managers, until computer-driven profit-taking sequences will hit the proverbial tape. Fund flows began to materialize in Q1 following the largest outflow of same from the period of July to year-end 2008 – a time when commodity indices showed their heftiest declines in half a century.

US Gold dealers report ample supplies of Eagle gold coins, and at retail mark-up premia (near 5%) that are the lowest in some two years. Contrast that with the situation one year ago, when a putative mad scramble was on, the Mint halted sales, and dealers were asking 10% or more for one-ounce coins (normally, the pricing on half-ounce or smaller units). Silver got off to a bit of a rocky start this morning, losing 7 cents at $17.14 but the trade was thin enough for players to be able to go out for several runs of latte without missing much in the process. Platinum showed a $3 loss at the start of the day, quoted at $1334 but palladium remained flat, posting a $302 spot quote. Once again, no change was reported in rhodium – the metal is trading at $1500 on the bid side.

We wish you all a pleasant weekend, and, to our Jewish clients, readers, and business partners – A Happy New Year!